Can HRA Funds Be Used to Pay Health Insurance Premiums?

A health reimbursement arrangement is a way for employers to reimburse employees for their out-of-pocket healthcare costs without the employees having to pay federal tax on the money involved. As far as the federal government is concerned, they can generally be used to pay for a wide variety of medical expenses, and employers have wide latitude to determine how much they're willing to reimburse per year and what types of expenses to cover.

HRA Plans and Insurance

If your employer sets up an HRA plan, the company will provide you with funds under the terms of your plan to reimburse you for allowed medical expenses. These funds aren't subject to income tax or to Social Security or Medicare tax and can only be used for medical expenses allowed by your plan that would qualify for the IRS medical and dental expense deduction, as well as health insurance premiums, long-term care insurance premiums and drugs that you're prescribed. Your employer can either reimburse you after the fact for out-of-pocket expenses or provide you with a credit or debit card linked to your plan to let you make payments to doctors, pharmacies and other medical providers.

Your employer must provide all the funds in the HRA account. You're not allowed to contribute funds to the account yourself, and if you're self-employed, you can't set one up for yourself. The account can cover the employee's medical expenses as well as medical expenses for the employee's dependents or spouse. Over the counter drugs aren't covered, unless you're prescribed them by a doctor.

If you don't use all the funds in your account in a tax year, they can roll over to the next year. If your employer lets you use them for something other than a medical expense, or provides you the unused funds, that counts as ordinary taxable income.

The Medical Expense Deduction

Beginning in 2019, for the taxes that will be filed in 2020, you can only deduct out-of-pocket medical expenses that come to more than 10 percent of your adjusted gross income. That doesn't include expenses covered by medical insurance or ones where you're reimbursed by your employer through an HRA plan.

In some cases, depending on your medical spending, it may make sense not to claim reimbursement through your HRA if you've already hit the 10 percent threshold, if you can roll the HRA funds over to another year. You must itemize your deductions to take the medical expenses deduction.

Recent Tax Law Changes

HRAs are largely unchanged despite the numerous policy reforms that went into effect for tax year 2018. But if you are considering whether to use an HRA or the medical expense deduction, one thing that has changed is the standard deduction was increased for tax year 2018 (for taxes to be filed in 2019) to $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing jointly. For the 2019 tax year (to be filed in 2020), it goes up to $12,200 for singles, $18,350 for heads of house and $24,400 for married couples filing jointly.

These changes may affect your decision about whether to take the standard deduction or itemized your deductions, including the medical expense deduction. The IRS instructs taxpayers to choose whichever option gives the best tax br